Newsletter for April 2002

Take a moment to read this month's Featured Question and you just may save yourself time and money; you'll find the most common filing errors, including basic reminders and advice on reporting retirement earnings and distributions. Tax Corner highlights one way to reduce your chances of being selected for an audit, and reminds you of the important IRA deadlines fast approaching. The Article Briefings offer a quick survey of many hot topics in retirement and retirement planning. Learn about pending changes in Roth IRA rules, as well as new options in long-term care insurance, and "granny-cams" in care facilities. all this and more below, in the April issue of the Retirement Newsletter.

Featured Question of the Month
How to Avoid Tax Filing Errors

Tax Corner
Reduce the Chances of an Audit
IRS Deadlines for IRAs

Article Briefings
Check Out the Competition in Long-Term Care Insurance
Senate Democrats Tap Social Security in Budget Plan
Support Grows for Cameras in Care Facilities
Pensions Are Losing Popularity
Be Patient: Rules on Roth IRAs to Expand

Resource Link
Online Tax Help from the IRS
Online State Tax Forms and Information

Q. I prepare my own tax returns and would like to know how to avoid errors that lead to incorrect or delayed refunds.

A. Using tax preparation software goes a long way in cutting down errors on your tax forms. However, 30 million Americans still prepare their taxes by hand and often stumble into a number of common mistakes. You can avoid some of these errors by taking a few minutes to browse this list of common mistakes.

  1. Errors reporting the 2001 tax rebate. The number one error for the 2001 tax year centers on the rebate check that was issued to most Americans as the result of tax reform legislation. This rebate, most commonly in the amount of $600.00 or $300.00, was actually an advance rebate for the 2001 tax year, in addition to any refund you receive after filing your standard paperwork. Form 1040 addresses this rebate, but the terms have caused a lot of confusion. Line 47 of Form 1040 asks you to calculate a "rate reduction credit," which is based on whether or not you received the rebate check. But the term "rate reduction credit" has led people to believe this is some other tax credit, rather than the rebate check they have (in most cases) already received. The only reason to use the rate reduction credit line is if you didn't receive the maximum rebate amount you were owed or if you never received the check because of address errors or other mail processing problems. Page 36 of the Form 1040 instructions provides a worksheet that walks you through the necessary steps.

  2. Forgotten attachments or documentation. If you don't file electronically, you must attach all W-2s and 1099s that have withholdings. Also, nearly every number in the income section of Form 1040 requires a supporting schedule. For example, net business income requires Schedule C, capital gains and losses require Schedule D, and interest and dividends (mandatory if over $400) require Schedule B. Keep in mind that some of those schedules also require additional supporting schedules or other forms.

  3. Making an incomplete report on your general income. Almost any form of income is taxable. This means that you must report not only your wages, but also income from all other sources such as investments, lotto winnings and, in most cases, legal settlements. If you didn't receive a 1099 for one of your accounts, contact your bank or brokerage firm. An error in their mailings does not mean that your investment income isn't taxable.

  4. Making an incomplete report on social security income. Your social security payments may indeed be taxable. Form 1040 instructions include a sizable worksheet to help you make this determination. It may look daunting, but don't skip it.

  5. Tracking other retirement income incorrectly. If you received retirement distributions from a source other than social security, it will be reported on Form 1099R. The distributions may fall into one of three categories: 1) taxable (usually from traditional IRAs), 2) nontaxable (usually from Roth IRAs), or 3) "taxable amount not determined." This third category would apply if you make a post-tax contribution to a nondeductible IRA; in this case, the IRS knows that you owe money, but does not know the exact amount because it does not know the amount of your earnings. In this case, you are responsible for making an accurate calculation of the taxable amount.

  6. Choosing the wrong filing status. Filing as "head of household" is usually more beneficial than filing as "single" or "married filing separately." Many people who qualify for this filing status don't realize it. If your children live with you and you pay more that half the costs of your home, check out this option. Form 1040 instructions provide more details. If you live with a partner, this does not qualify you for "married filing jointly." Also, be sure to check carefully whether the standard deduction or itemized deductions are more beneficial. One clear benchmark is home ownership. If you own a home, you should probably itemize your deductions. Itemizing can put a lot more money into your pocket than simply taking the standard deduction.

  7. Errors in social security numbers. Providing the wrong social security number is one of the most common mistakes people make. Double-check and triple-check that the numbers are correct for you, your spouse, and your dependents.

  8. Omitting your signature. Don't forget to sign your return. This includes your spouse, if you are "married filing jointly." As simple as it seems, many people miss this part. Your filing will be rejected.

  9. Overlooking eligibility for tax credits. Tax credits include education credits, income credits, and childcare and dependent credits. Slow down and look at these items carefully. Many people don't realize that they qualify, or they miscalculate the amount of the credit they can claim.

  10. Failing to file while living overseas. Unless you give up your American citizenship, you must file a tax return every year and pay any applicable taxes. For more information, see IRS Publication 519 - U.S. Tax Guide for Aliens.

Reduce the Chances of an Audit

According to our expert (a former IRS employee who selected returns for audit), it's a good idea to request an extension if you haven't filed yet. Returns filed between April 1st and April 15th are more likely to be audited than returns filed at other times of the year. This happens because IRS statistics show that people who wait for the last minute and file under pressure tend to make more mistakes.

For federal individual returns you need IRS Form 4868 "Application for Automatic Extension of Time to File U.S. Individual Income Tax Return," which can be downloaded from the IRS website (see Resource Links). If you decide to apply for an extension, remember these two things:

  1. This extension gives you more time to file your return, NOT more time to pay your taxes if you owe them. Read the instructions carefully.

  2. You MUST file extension requests with any and all states where you are required to submit a return. That includes the state of your residence AND any non-resident state returns you are required to file (see Resource Links for state tax websites).

Important IRS Deadlines for IRAs

Check Out the Competition in Long-Term Care Insurance
Washington Post [], 03/28/02, Pg.B2; Barr, Stephen.

The federal government has unveiled its long-term care insurance program for federal workers, claiming that it is 15% to 20% less expensive than those plans in the private sector. However, financial analysts suggest that federal workers examine both public and private options before committing themselves to a particular policy. According to Arthur Stein, a certified financial planner with Cassaday & Co., single people under the age of 60 and married couples may be better off with policies from the private sector because they offer longer-lasting benefits and lower premiums, while singles over 60 might fare better with the government's policy.

Senate Democrats Tap Social Security in Budget Plan
Washington Post [], 03/21/02, Pg. A8; Kessler, Glenn and Aileron, Juliet

Few Senate Republicans are expected to support Democrats' recently unveiled budget plan, which taps Social Security every year over the next decade. However, the competing $2.1 trillion GOP budget plan does little to bring the budget back into balance, and it fails to allocate money to curb the coming rise in prescription drug prices. The Democrats' budget blueprint would devote more money to education and social programs in the short term.

Support Grows for Cameras in Care Facilities
Wall Street Journal [], 03/07/02, Pg. B1; Greene, Kelly.

Though many nursing homes oppose the use of surveillance cameras in patient rooms because of the invasion of privacy, the use of so- called "granny cams" is on the rise. Texas has already implemented a law clarifying the rights of families to install video cameras, and Florida, Maryland, Massachusetts, Michigan, New Jersey, Pennsylvania, and West Virginia are considering pilot projects or similar legislation. However, some nursing homes worry that cameras will keep workers away and trigger a deluge of lawsuits and soaring liability insurance premiums; some insurance companies may even refuse coverage. Even so, some operators are installing cameras themselves as a way to attract competent employees and protect them from accusations of abuse. Cindy and Mark O'Steen, owners and operators of Lake City, Fla.-based Southland Suites, say cameras ensure their staff is well-trained and may have even contributed to lower liability-insurance premiums, which fell from $57,000 last year to $11,000.

Pensions Are Losing Popularity
Los Angeles Times Online [], 03/18/02; Weston, Liz Pulliam.

An Employee Benefit Research Institute study discovered that only 6% of workers surveyed believed defined-benefit pension plans were essential, compared to 25% who thought 401(k)s were. Traditional pension plans are on their way out as costs increase and employees rely more on stock options and 401(k)s for retirement savings. However, many financial experts conclude that 401(k)s should be a supplement rather than a substitute for traditional plans because the stock market is not always going to be on the rise--as we have seen in recent years. As the manufacturing sector has lost economic importance, so have unions and traditional pension plans, even though many of the plans are covered by the Pension Benefit Guaranty Corp. Analysts contend that many companies that have failed to make contributions to their plans in the past will either freeze or discontinue their plans--preventing current members from accruing further benefits and new employees from joining.

Be Patient: Rules on Roth IRAs to Expand
New York Times [], 03/12/02; Johnston, David Cay.

Starting in 2006, employers will be able to offer a new Roth 401(k). Workers will be allowed to have both traditional and Roth 401(k) plans, and will be able to save a combined maximum of $15,000 each year. The significant advantages Roths have over traditional plans are that withdrawals are not required and investment is made with after-tax dollars. So, after 5 years or more, when the money is withdrawn, the distributions will be tax-free.

U.S. Internal Revenue Service

As the tax filing deadline approaches, remember that the IRS web site provides immediate answers to many of your tax questions and offers fast access to numerous tax forms and publications. The substantial list of Frequently Asked Questions covers most of the basics in clear, succinct language and provides easy links to download related forms and publications, including Form 4868.

State Tax Forms and Information

Here you will find links to the tax websites for each of the 50 states, plus the District of Columbia and four US territories. Some states have more information than others and may contain business forms or others, so look carefully for the individual forms you need, especially if you are filing for an extension. Each state will have a different number for that form.


(c) 2001 Copyright Claimed, Internet Retirement Alliance.

Abstracts (c) Information, Inc., Bethesda, Maryland 301-215-4688. Redistribution is prohibited.

The material and information herein is obtained by from a wide variety of sources. The Internet Retirement Alliance ( believes this information is accurate, current, and authoritative, but it may not be. The Internet Retirement Alliance ( provides the information "as is" without any express or implied warranties.

The Internet Retirement Alliance ( does not provide legal, accounting, investment, or other professional services. If the reader requires legal, accounting, investment, or other expert assistance, the services of a competent professional person should be sought.

Back   | Home   |  Newsletter Archive